American Apparel under threat of bankruptcy

US retailer American Apparel has warned that it may be forced to file for bankruptcy protection after it posted significant losses in its fourth quarter and full year results, with further losses predicted in the upcoming year.

The LA based business, which sells womenswear, lingerie, nightwear, swimwear and hosiery, told the Securities and Exchange Commision that it was ‘experiencing significant liquidity constraints.’

It added that should these constraints not be successfully addressed, it might be forced to seek protection under Chapter 11 of the US Bankruptcy Code.

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Falling sales combined with rising yarn and fabric prices have been cited as the cause of the company’s difficulties, with American Apparel stating ‘there exists substantial doubt that the company will be able to continue as a going concern.’

The bankruptcy concerns are only latest in a string of problems to envelop the company, which recently amended a credit agreement with one of its key lenders.

Founder and chief executive Dov Charney currently faces a $250 million fine after a former employee filed a sexual harassment lawsuit against him and production was also disrupted in 2010 after the firm was forced to dismiss thousands of illegal workers.

This “resulted in significantly higher production costs per unit and late deliveries of products to our stores and to our wholesale clients," said acting president Tom Casey.

The latest crisis occurred after American Apparel reported a $19.3 million loss in its fourth quarter financial statement, with sales in the three months leading to December 31 dropping by 8.9 percent to $144 million.

In the same period, retail sales for the dropped by over ten percent to $96.9m, wholesale revenues declined by 6.0 percent to $36.2 million and online sales slipped by 4.4 percent to $10.9 million.

Over the full year, net loss reached $86.3 million and net sales dropped by 4.6 percent to $533 million.

The company predicts that the first quarter of 2011 will result in negative mid to high single digit comparisons. It is presently working to reduce inventories and generate $30m in cost savings over the next few years through efficiencies in retail, distribution, administrative and manufacturing processes.

America Apparel chief executive and founder Doc Charney added: "I believe we are well along on our journey to restore manufacturing efficiency.”

"We have solid plans to drive increased sales through existing and new channels. We are also diligently working on improving our return on invested capital through effective asset management. Therefore, I believe we will restore the company’s historical levels of profitability by 2013."

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